(CelebrityAccess MediaWire) — Recently, we got some mail from the IRS. Unlike most mail from the IRS though, this letter contained good news. The IRS has started a new initiative to make taxpayers aware of an underused regulation that's been on the books but is quite useful in regards to touring musicians and atheletes.
I am Sam Froio with the Internal Revenue Service, USA. We are currently in the process of initiating Central Withholding Agreements (CWA) with touring non-resident entertainers. Current law requires a 30% withholding rate on the gross income earned by foreign persons from sources within the United States. However, since entertainers incur substantial deductible expenses during the course of their U.S. engagements, strict adherence to the 30 percent rate could create a financial hardship, which could result in cancelled tours or appearances and loss of revenue to the Government. Additionally, in many instances where 30 percent of gross income was withheld, entertainers received large refunds when they file their income tax returns as a result of allowable expenses. After careful review of an entertainer's projected income and expenses, IRS considers withholding agreements based on net tour income rather than gross income.
Example: A non-resident entertainer has a contract for an event to be held in the United States. Per the contract, the entertainer is to be paid $1,000,000.00 for participating in the event. The entertainer has expenses for manager, crew, lodging, food, etc. of $400,000.00. The entertainer takes home $600,000.00, correct??? Not exactly! Based upon the regulation requiring 30% backup withholdings from the gross earning of the non-resident alien, the entertainer will collect $1,000,000.00 minus $300,000.00 in withholdings minus $400,000.00 in expenses for a net of $300,000.00.
Wait a minute…. that's half of what you expected to keep. Sure, you knew there would be taxes but certainly not half of your net earnings! Even if you were in the top income bracket, the highest tax on this earning would be 35% or $210,000.00. That is $90,000 less than what is being withheld! Do you have to wait until you file Form 1040NR next year to get your $90,000 refund? Not if you qualify for a Central Withholding Agreement (CWA).
A central withholding agreement is a contract entered into between the entertainer, the paying/withholding agent of the entertainer, and the Internal Revenue Service. In a CWA, the contract for the event/tour, along with a budget for the estimated expenses to be paid by the entertainer for that event/tour, are submitted to the IRS. Once the IRS approves the estimated budget, all parties sign and execute the agreement. The IRS then informs the withholding agent of the amount that is to be withheld, using the net amount rather than the gross and using the graduated rates afforded to US resident aliens and US Citizens. Under no circumstances will a withholding agreement reduce taxes withheld to less than the alien's anticipated income tax liability.
A Central Withholding Agreement could allow a non-resident entertainer/group to take home more of the money they earn on tour in the United States.
In order to file a Central Withholding Agreement, you need the following:
1. A list of the names and addresses of the nonresident aliens to be covered by the agreement.
2. Copies of all contracts that the aliens or their agents and representatives have entered into regarding the time period and performances or events to be covered by the agreement including, but not limited to, contracts with:
a. Employers, agents, and promoters,
b. Exhibition halls,
c. Persons providing lodging, transportation, and advertising, and
d. Accompanying personnel, such as band members or trainers.
3. An itinerary of dates and locations of all events or performances scheduled during the period to be covered by the agreement.
4. A proposed budget containing itemized estimates of all gross income and expenses for the period covered by the agreement, including any documents to support these estimates.
5. The name, address, and telephone number of the person the IRS should contact if additional information or documentation is needed.
6. The name, address, and employer identification number of the agent or agents who will be the central withholding agents for the aliens and who will enter into a contract with the IRS. A central withholding agent ordinarily receives contract payments, keeps books of account for the aliens covered by the agreement, and pays expenses (including tax liabilities) for the aliens during the period covered by the agreement.
For more information, on this and other tax-related questions, email Taxpayer Education and Communication or on the web at Central Witholding Agreements at the IRS. A permanent link has been added to our links page under Business and Financial.